These Regulatory Technical Standards (RTS) specify certain elements of the calculation of own funds requirements for credit valuation adjustment (CVA) risk. CVA is the risk of loss caused by changes in the credit spread of a counterparty on derivatives transactions due to changes in its credit quality. The Capital Requirements Regulation (CRR) introduces two methods for calculating CVA risk, respectively a standardised and an advanced method, and mandates the EBA to specify how a proxy spread should be determined for the purposes of identifying the LGDMKT (Loss given default of the counterparty) and to provide details on what constitutes a limited number of smaller portfolios under the advanced method for calculating CVA risk.

The European Banking Authority (EBA) launches today a data collection exercise to advise the European Commission on appropriate amendments to the European Credit Valuation Adjustment (CVA) framework and inform discussions on the CVA risk charge in Basel. Banks with substantial portfolios of OTC derivatives are encouraged to participate in this data collection exercise on a voluntary basis.

The EBA will use the data collection exercise in order to inform the recommendations made in its report to the European Commission (EC) on CVA risk in accordance with CRR Article 456(2); the exercise will also be used to support the EBA review on the application of CVA charges to non-financial counterparties established in a third country in accordance with CRR Article 382(5). Where appropriate, the EBA will use the conclusions of its CVA report to inform international discussions on CVA risk.

This data collection exercise will be carried out on a voluntary basis. However, the EBA expects banks with relatively substantial portfolios of OTC derivatives to participate in the exercise, regardless of whether they use the advanced or the standardised method for CVA risk. In this respect, the EBA has prepared a standardised template that participating banks will be requested to fill in. In order to help banks fill in the template, instructions are also available on the website.

Participating banks are expected to submit the template of the data collection exercise to their respective National Supervisory Authority by 31 July 2014.

Throughout the exercise, participating banks can submit questions on the template or instructions, together with a suggested answer, by e-mail to CVA-report@eba.europa.eu.

Participating banks will be invited to a presentation of the main outcome of the data collection exercise in the EBA premises in September 2014.

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on the definition of market and its final draft RTS on Credit Valuation Adjustment risk (CVA risk). The latter is supplemented by an Opinion on CVA risk which further elaborates on the approach taken by the EBA in determining a proxy spread. The standards will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union (EU).

The final draft RTS on the definition of market relate to the definition of the term ‘market' to be applied for the calculation of the overall net position in equity instruments under the market risk standardised rules. The overall net position in equity instruments is used to calculate own funds requirements for equity general market risk according to Article 343 of the Regulation. The definition of market is based on a currency criterion, but solely for jurisdictions included in the Euro-zone. For the other jurisdictions, ‘market' is defined using a nationality criterion. The currency criterion applied for the Euro-zone recognises that the introduction of a single currency has addressed some important elements of segmentation among equity markets, such as the elimination of foreign exchange currency risk, the presence of a common currency in which company results are reported or the existence of an integrated market with common rules.

The final draft RTS on CVA risk for the determination of a proxy spread and the specification of a limited number of smaller portfolios specify the data quality requirements and the minimum granularity of the attributes of rating, industry and region that institutions should consider when estimating an appropriate proxy spread for the determination of the own funds requirements for CVA. The standards provides the necessary flexibility in the determination of a proxy spread, so as to ensure an operational framework that uses the approved internal model for the specific risk of debt instruments for market risk. The RTS also specify the number and size of portfolios that fulfil the criterion of a limited number of smaller portfolios and, therefore, are allowed into the CVA Advanced approach despite not forming part of the scope of the Internal Model Method (IMM) for counterparty credit risk. Thresholds are defined in terms of number and size, below which non-IMM netting sets are deemed to fulfil the criterion of a limited number of smaller portfolios and, subject to permission from competent authorities, are allowed into the advanced method for the calculation of their own funds requirements for CVA risk.

The EBA opinion on CVA risk for the determination of a proxy spread states the main reasons why the EBA adopted a flexible approach in the final draft RTS on the determination of a proxy spread. In particular, the EBA questions the appropriateness of a unified proxy methodology for both market and CVA risks against an alternative approach that would require a proxy methodology to be used for CVA purposes only. However, the EBA recognises that this issue is part of a broader issue related to the entire CVA framework and that any possible solution should be further evaluated in light of its consistency with the Basel framework. In accordance with Article 456(2), the EBA is mandated to produce a report, whereby, in light of the issues raised by the implementation of the CVA risk charge, the relevance of some of the features of the CVA framework, together with the relevance of the provisions of these RTS, may be reconsidered.

Legal basis and next steps

The EBA has developed these final draft RTS in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (colloquially known as Capital Requirements Regulation or CRR).

The final draft standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.